Buying a franchise


16th May, 2022

Buying a franchise: Pros and cons to consider

Buying a franchise can be a rewarding path to business ownership, but understanding what to watch out for before taking the plunge can spell the difference between success and failure.

Ambitious business owners with validated products or service offerings are always looking for ways to increase their market share.

But business expansion requires a significant amount of capital – something which can often be difficult to come by, or risky to obtain.

Despite having proven their model, some business owners opt to take the conservative approach to expansion and only use their business profits to fund their growth.

Other business owners will take a more aggressive approach and raise expansion funds through debt or equity financing, where they either take out a large loan and retain complete ownership or relinquish a certain percentage of their ownership in exchange for capital.

Another way to fund expansion is through franchising, a process in which the business owner (the franchisor) enters into an agreement with a third party (the franchisee) and grants them rights to its Intellectual Property, allowing them to own and operate a branch of their business.

Franchise agreements enable the original business owner to grow their venture exponentially, and while they may not receive the profits of each branch of their business, they benefit through the collection of fees and royalties along the way.

Advantages of buying a franchise

While the choice to turn a business into a franchise can bring obvious benefits to the franchisor, becoming a franchisee has some major upsides as well – especially when compared against starting a business on one’s own.

In particular, there are five potential advantages to buying a franchise:

Easy transition into business ownership

Becoming a franchisee means that you are able to be a business owner while leveraging off the experience of those who have brought the business to where it is. Previous experience in running a business isn’t a must, and there won’t be much stopping you from getting started quickly.

Essentially, it is a relatively low-risk opportunity to upskill as a business owner.

Leverage off a pre-existing brand

Many business owners will tell you that brand and reputation development is one of the most difficult parts of getting a business off the ground. Brands need time to stick, and reputations take years to build.

With franchises, the name, brand, and reputation are already there, giving you the opportunity to benefit from those assets without taking part in their development.

Access to unique resources

Whether it be training, technical support, research and development, or administrative processes, being part of a franchise means that a plethora of useful resources are likely to be at your disposal.

As a franchisee, accessing these resources means that you don’t have to reinvent the wheel for any of these processes, and you can instead spend more time building your branch successfully.

Cheaper purchasing through economies of scale

One of the main challenges that new business owners tend to experience is the cost of purchasing goods or services in small quantities. Purchasing a franchise often enables you to sidestep that challenge entirely.

Most of the time, the suppliers for all goods and services for a particular franchise will be streamlined, which means that the rates provided are typically ‘wholesale’ or ‘at scale’ rates.

This allows franchisees to sell their products for cheaper than their competitors, without having to sacrifice the size of their profit margins.

Easier access to financing

If a regular business owner needs additional funds, for whatever the reason, they generally need to resort to equity or debt financing options to access them – which is often very expensive and resource draining.

Franchisees, on the other hand, are very often able to turn to their franchisor and request this financing and given that any cost to the franchisee is generally a cost to the franchisor, the financing is likely going to be free, and require very little admin in order to occur.

The common thread between each of these advantages is that the franchisor has a vested interest in the success of each franchisee’s branch, which has the potential to grant the franchisee the best of both worlds – running their own business while having a comfortable cushion to lean on while doing so.

Disadvantages of buying a franchise

Despite these advantages though, people looking into the purchasing a franchise should make no mistake – doing so doesn’t come without its own set of pitfalls as well.

To put it broadly, there are four notable downsides to purchasing a franchise:

Your fate lies in the hands of the franchisor

One of the major downsides to purchasing a franchise is that, irrespective of how successful your specific branch might be, if the franchisor experiences any significant setbacks, they are likely to flow through to your branch of the business too.

Additionally, the franchisor has the power to introduce new elements to the business that can significantly change the scope of how the company operates, which can in turn have a major impact on the experience of running your branch.

You are beholden to the choices of the other franchisees

Further to the last point, even if the franchisor’s visions and actions remain aligned with your own, if another franchisee does anything to jeopardise the company’s reputation, it’s more than likely to impact your branch too.

Some of the benefits may not be as great as anticipated

While the five key benefits associated with purchasing a franchise outlined earlier might seem lucrative and helpful, there are no guarantees that they will be worthwhile.

For instance, if the franchisor has an ordinary purchasing manager, economies of scale may not be a factor. Or, if the franchisor’s administration processes are inefficient, they are likely to slow you down too.

This is where performing due diligence and researching a business from top to bottom is imperative prior to making any purchasing decision.

Terms often favour the franchisor

When it comes to drawing up the terms for the agreement between the franchisor and franchisee, more often than not, the terms pertaining to the renewal or termination of the agreement are more favourable for the franchisor.

This being the case, even though things may appear to be going well in the franchisee’s eyes, the entire agreement can be brought to an end in circumstances that are not desirable for the franchisee.

The underlying message across each of these disadvantages is that purchasing a franchise means that a franchisee’s autonomy levels are almost always lower than those of a standalone business owner – a factor that needs to be strongly considered before entering into such an agreement.

Questions to ask when buying a franchise

After considering the pros and cons of purchasing a franchise, if the advantages outweigh the pitfalls, the next step is to start looking around for a franchise opportunity.

When approaching franchisors, it is important to ask the right types of questions and take note of the answers provided. This will help you paint a clear picture of options available to you, enabling you to make an informed decision about your next steps.

Some questions you might want to consider asking the franchisor include:

  • What are their long-term plans for improvement and growth?
  • How much working capital do they anticipate being required?
  • Do they provide training? If so, how extensive is this training?
  • How long after purchasing the franchise do they expect to see a break-even result?
  • How are the franchise fees calculated?
  • What types of benefits will they provide?
  • How do they vet their franchisees?
  • What is their franchisee grievance process?
  • How do they differentiate themselves from other franchisors?

While this list is not exhaustive, the way in which the franchisor answers them should act as a strong indicator of how a relationship with them is likely to unfold.

How to buy a franchise

Once you’ve done your research and are ready to take the plunge and become a franchisee, the process of buying the franchise typically involves the following steps, each of which involving a set of tasks that need to be completed in order for the next step to begin.

1. Consider your suitability for the type of franchise you’re looking at purchasing

2. Undertake significant background research into the franchise you’re considering

3. Visit existing branches from within the franchise and talk to employees, managers, and even customers if applicable or possible

4. Confirm your decision and arrange the financing

5. Request the franchise agreement from the franchisor and have it reviewed by a legal professional

6. Execute the agreement

7. Obtain a training schedule, launch dates, and request introduction to key people within the franchise

Following these steps will ensure that you are well placed to launch the franchise from a position of strength, knowledge, and in way that is likely to yield successful outcomes for your branch, as well as the entire franchise.